Where is Infosys’ Wave 3 Strategy?

Infosys (INFY) announced its Q4 results on Tuesday. For the quarter, it met analyst expectations with revenues of $1.14 billion and EPS of $0.54. Its revenues reported a 32.3% increase over Q4 previous year, while EPS grew by 20% over the period. The company's revenue for the year reached $4.18 billion. For the first time ever, its net profits for the year crossed $1 billion.

Region-wise, revenue share from Europe increased to 29.3% for the quarter versus 26.6% for the year before, and American revenue contribution reduced from 62.6% in Q4 previous year to 60.7% in the current quarter. The rest of the world's revenue share reduced from 10.8% the previous year to 10% in the current Q4.

Segment-wise, Application Development and Maintenance [ADM] contributed 45% to the quarter’s revenues. In the previous year Q4, ADM had contributed 46.3% to revenue. Consulting Services brought in 24.1% of the revenues for the quarter compared to 22.7% for the previous year. Business Process Management contributed 6%, Infrastructure Management 4.6%, Product Engineering Services 1.8%, System Integration 3%, Testing Services 7.2% and others contributed the balance 4.4% of its revenues for the quarter.

Going forward, for Q1 the company is expecting revenues of $1.142 - $1.145 billion, representing a 23.1 – 23.4% year on year growth with earnings expected at $0.52 or 18.2% higher. Analysts were expecting revenues of $1.18 billion with an EPS of $0.52.

For the year, it is expecting a 19-21% growth in revenue to reach $4.97 - $5.05 billion, and a 16.7 – 18.7% growth in earnings to reach $2.31 - $2.35. The market was expecting higher revenue of $5.23 billion with an EPS of $2.36.

Infosys’ reported financials sent its stock to a 10% intra-day increase. On Tuesday, the stock closed 8.5% higher at $39.67.

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Its numbers might look rosy for the quarter, but the management is aware of pressures of the recession ahead. Its revenue growth for the quarter slipped to 5% compared to the 6% reported in the previous quarter. The company has witnessed delays in decision making, and the cancellation of a few projects.

While the short term looks rosy, the long term appears less so. I have repeatedly said that Infosys needs to,

take a good look at the software eco-system in the U.S., and decide on a strategy that enables them to play in the more leveraged technology/IP driven business models, and change the business mix.

But, so far, I have not seen IP-driven acquisitions as part of its strategy.

The company continues to talk about the advantage of its ‘global delivery model, consulting and solution capabilities, and a strong platform for customers.’ However, in the increasingly diverse globalization trends, China, Eastern Europe, Latin America, and other countries would become bigger factors, which its competitors like IBM (IBM) and Accenture (ACN) have more experience handling.

I am not convinced about its ability to cope with the declining labor cost arbitrage advantage longer term. In my highly controversial Death of Indian Outsourcing series, I highlighted the impact that SaaS can have on pure body-shopping. Infosys needs to migrate out of pure body shopping, and start investing heavily into SaaS and IP.

As Mastek CEO Sudhakar Ram writes, India is in Wave 3 of IT outsourcing. Where is Infosys’ Wave 3 strategy?

Comments

[manuvns]

It's strange to compare North Dakota and Hyderabad. 1:3 labor cost still make sense given the quality of work is comparable .

[Schwann]

It seems that SaaS investment is primarily in the new upgrade to the Finacle product The consulting services of Infosys also include Package Implementation as per factsheet on Infosys.com - this contributes about a quarter of its revenues. I suspect this includes the Enterprise Solutions of units where the CRM and such related implementations have an interest in promoting SaaS. I'm interested in how this section will grow in the next 2-3 years.